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Recipe For Growth: Give Central Banks Plenty Of Slack...

September 13, 1992

Economic Trends

RECIPE FOR GROWTH: GIVE CENTRAL BANKS PLENTY OF SLACK...

Long-term economic growth was the topic occupying center stage as many of the nation's leading economists and central bankers from around the world gathered in late August at a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyo. As the group mulled the current global slump and the slowdown in the industrial world's expansion since the 1960s, the emphasis was on promoting investment in human and physical capital.

In one presentation, Lawrence H. Summers, chief economist at the World Bank, and J. Bradford DeLong of Harvard University linked economic growth to a political variable: the degree to which a central bank is independent of government control. In the process, they managed both to compliment and, by implication, to admonish the two central banks that currently call the tune on world monetary policy: America's Federal Reserve and Germany's Bundesbank.

The more independent a central bank is from political pressure, the more likely a country is to keep inflation under heel, say Summers and DeLong. Low, stable inflation permits businesses to invest for the long run without fear that a price surge will cause authorities to tighten money and throw the economy into reverse. At the same time, low inflation minimizes price distortions that hamper efficiency. Thus, the two economists find that countries with independent central banks tend to achieve greater rates of productivity growth.

Summers and De Long identify the central banks of Switzerland and Germany as the most independent in the postwar era, followed by the U.S. Those three countries also showed the lowest inflation rates from 1955 to 1990. Least independent, they find, were the central banks of Italy, New Zealand, and Spain, countries wracked by the highest inflation rates in the industrial world.

But while praising the U.S. and German central banks, Summers warns that monetary restraint can be overdone. He believes that current inflation rates are far more acceptable than the zero-inflation policies often espoused by representatives of the Bundesbank and the Fed. "The case for zero inflation, rather than 3%-to-4% inflation," says Summers, "is at best unproven. It is doubtful that zero inflation should take priority over growth anywhere in the world."GENE KORETZ